Intel's Mobile Losses Are a Necessary Evil

Intel is losing a ton of money in its pursuit of mobile, but these losses are required to ensure the company's long-term future in computing.

Jun 23, 2014 at 2:05AM

Intel's (NASDAQ:INTC) Mobile and Communications Group lost approximately $3.2 billion during its fiscal 2013. There's no sugar-coating the fact that these losses are substantial.

But while these losses have been a significant drag on Intel's bottom line, it is important to understand why the company's management team is making the strategic decision to incur these very heavy losses. The plain and simple fact is that it costs a lot to develop the technologies required to be competitive in mobile.

It costs serious cash to play in Qualcomm's arena
Over the years, wireless chip powerhouse Qualcomm (NASDAQ:QCOM) has developed leadership IP in graphics, modems, RF front end, memory controllers, system-on-chip fabric, CPU cores, and more. Not surprisingly, Qualcomm is far-and-away the market share leader in mobile processors. 

Given that Qualcomm spends north of $3 billion per year on mobile/wireless chip-related R&D, a competitor would need to spend at least as much just to try to gain an even technological footing. In the process, such a challenger would need to incur severe losses before the product pipeline has a shot of generating revenue. 

That's what Intel is doing
While some will claim that Intel's "contra-revenue" scheme to offset a bill of materials deficiency is what drives the company's massive mobile losses, this simply doesn't make sense. Intel barely shipped 10 million tablet chips in 2013 (and to investors' knowledge, these did not require contra-revenue support), and the division still lost $3.2 billion.

The loss, of course, will get worse in 2014 as Intel provides contra-revenue support likely in the range of $10-$20 for each of its tablet chips shipped this year (and there will be 40 million of them). As you can clearly see, though, the contra-revenue hardly constitutes the bulk of the operating loss (and this is a temporary measure that should be largely eliminated by 2015).

The losses don't go away until the revenue comes in
In order for that greater-than-$3 billion loss to go away, Intel will need to drive pretty significant revenue growth in its Mobile and Communications business. Depending on your assumptions, this business requires about $7-$8 billion in sales to reach breakeven.

Today, Intel's Mobile and Communications Group consists of discrete 2G/3G and now 4G modems. Going forward, Intel will need to participate heavily in the mobile applications processor space (tablets and phones) if it is to generate enough revenue to bring that division to breakeven.

Can't Intel just ditch mobile?
While the obvious solution to this problem would be to "ditch mobile," the not so obvious answer is that this would be a long-term strategic error for the company. Intel is fundamentally a computing company, and for the company to simply refuse to participate in the smartphone/tablet apps processor market (in aggregate worth over $20 billion today and growing) would be unwise. Intel should and will leverage its massive PC and server success today to fund its long-term future. 

Foolish bottom line
Breaking into new industries and trying to take share against an established incumbent is very difficult. Qualcomm is an exceptional company and its moat in wireless chips is very wide and deep. Intel is one of the few companies with the sheer financial and technical might to have even a prayer of competing profitably with Qualcomm in the long run, and it should attempt to do so while it is still massively profitable and can afford to do so. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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